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ANALYSIS

Sibanye wraps up platinum plan

18 December 2017 - 06:32
Allan Seccombe

Sibanye CEO Neal Fronema. Picture: ROBERT TSHABALALA

Sibanye-Stillwater has put its hand on the final big piece to complete its platinum strategy and will now look outside SA’s borders to grow in gold and silver, consolidating its position as a precious metals company.

Since listing in 2013, Sibanye has done eight deals in gold and platinum group metals (PGMs) worth more than R45bn, rapidly growing into a formidable mining company in the PGM space and the largest producer of South African gold.

Its appetite for deals remains undimmed despite the hefty debt incurred in the $2.2bn cash purchase of US palladium and platinum miner and recycler Stillwater Mining. The board concedes it can do no more deals for cash until it has significantly reduced debt levels over the next two years, using cash flows from its mines in SA, Zimbabwe and the US.

What Sibanye can use — and has just done with its R5bn offer for Lonmin — is its equity. If concluded as anticipated in the second half of 2018, the deal will give Lonmin shareholders 11.3% of Sibanye, which vaults into second place ahead of Impala Platinum in the rankings of largest platinum miners.

Sibanye CEO Neal Froneman says the firm now wants to focus on gold and possibly silver in South America. While Sibanye’s equity is relatively strong in SA, it is trading at a discount to its international peers, making it more difficult to acquire offshore assets.

Froneman makes the point that Sibanye is ex-growth in SA, where there are no more sizeable acquisitions it can make. AngloGold Ashanti and Gold Fields are down to single core underground assets, with the former conducting a large tailings retreatment business. Harmony Gold is scrambling for more gold mines in SA.

There are no more sizeable platinum assets Sibanye could buy in SA without running into competition constraints. Its focus is expected to be on North America for gold and South America for silver.

Sibanye was forced into making a play for Lonmin much sooner than it would have liked, having missed the opportunity in 2015, when the platinum miner’s share price collapsed by more than 90% to account for a massively diluted and unpopular rights issue.

Sibanye would also have preferred to take over Lonmin after that company had done the hard and dirty work of retrenching nearly half its workforce as it closed old and unprofitable mines.

But Lonmin, under the leadership of CEO Ben Magara, effectively forced Sibanye’s hand, knowing its interest in a deal since 2014, by publicly stating in November it was putting mines up for sale, selling off part of its processing and refining capacity and bringing in partners for one or more of its big capital-intensive projects.

Sibanye had to move quickly to avoid the destruction of the underlying value in Lonmin, says Froneman.

Lonmin had two choices: tear itself apart to create short-term value and appease bankers on edge about the company skirting dangerously close to breaching its debt covenants, or shut up shop at the cost of 33,000 jobs, creating social and political instability in the platinum mining region.

Lonmin took a calculated risk to push Sibanye into a corner and force its hand about 18 months sooner than Froneman would have liked, leaving the messy job of getting the transaction through the local competition authority with the 12,600 jobs to be cut over a three-year period. Magara says these jobs would have been lost whether or not Sibanye took over Lonmin, but the unions are not buying it.

The reality is that while Lonmin could ride out its financial distress in the short term by selling assets and processing capacity, there are old and unprofitable mines in its portfolio that must be closed to prevent the demise of the company and the loss of all 33,000 jobs.

Probably the biggest risk Sibanye is incurring by buying Lonmin is the social legacy issue, with Lonmin’s Marikana operations indelibly entwined in the police killing of 34 protesters after labour issues spilled over into the communities living in poverty around the mines.

Lonmin has simply not met its housing commitments in the area, prompting calls from non-governmental organisations and community groups for a review of Lonmin’s mining rights for failing to meet its obligations underpinning the granting of those rights.

Sibanye has stripped all big capital spending out of its plans for Lonmin’s assets once it takes control of them, arguing it cannot spend heavily on these projects while at group level it is focused on reducing debt, one of the company’s most pressing priorities. It cannot, however, escape the dire nature of living conditions around Lonmin’s mines and the social tinderbox it will acquire. It will take very little provocation or perceptions of provocation to set off disruptive and damaging protests.